|
THE
TURKISH TIMESl APRIL 15-30,2002
Screwball
Economics, Voodoo Financing:
Subsidies, a Thing of the Past?
Analysis by Ercument Kilic
Part
1 of 2
It was
5:00 o'clock in Ankara in February of this year, I was
making my way to
Esenboga
Airport.
Driving trough Dikmen and Asagi Ayranci, relatively
well to do segments of Ankara, I witnessed something
which became the subject matter of this article; the
bread lines.
'Apparently, all over Turkey now, such scenes are a
part of daily life and this disheartening scene on my
part has been a major topic of discussion in the media
for an extensive period of time. There doesn't pass a
day in Turkey that a news item related to, bread lines
is not printed; some sad, some curious; from articles on
the newly emerging, more affordable, "stale bread" ("bayat
ekmek") market, to articles stating: "consumption of
bread, despite consumer subsidies fell from a daily 12M
to 8M in Istanbul" respectively.
Further
self induced study and self provoked thought brought out
two results: One, 1 was sad to see Turkey swallowed so
far deep into this black hole called subsidies,
currently with no hope of a propelling action to spin
itself out of this endless cycle and two, to see that
this monster of subsides being a global disease
especially in underdeveloped and the so called
developing countries.
Along
the lines, there is good news and bad news on the matter
of subsidies and the breadlines in Turkey.
Good
news #1: TURKEY IS NOT ALONE: Turkey is not the only
country where such re employed, Turkey is not the first
country where lines of sorts are a part of daily scene.
As a matter of fact, the reason the lines of people in
the US for instance are invisible is because the
supporting bureaucratic system and the related work
force are ‘’ efficient’’ enough to do the job through
means other than actual lines of people on the streets.
Established in 1862 by President Abraham Lincoln for
instance such a work, force. in this country, the
Department of Agriculture (USDA) has become one of the
largest agencies in the Federal government with more
than 120,000 employees. For every four full time
farmers in the
US
there is one USDA bureaucrat on the payroll.
Good
news #2 THERE MAYBE , GOOD SUBSIDIES: An analyses of
subsidy policies for industrial and developing countries
in four sectors: energy, road transport, water and
agriculture may show that not all subsidies are "bad"
and indeed, that there may be "good" subsidies. In fact,
what makes the subsidy issue so complicated is that the
difference between beneficial and harmful subsidies may
well lie in the details.
A BRIEF
WORKSHOP ON THE CONCEPT OF SUBSIDIES before going into
“bad”.
A
definition of a subsidy is that it is a payment of money
or another form of an aid that the government gives to a
person, organization or businesses. It’s purpose is to
encourage some needed activity by furnishing funds, free
land, tax relief, or legal rights that might otherwise
be lacking. And the subsidies come into two shapes and
forms: Consumer subsidies and production subsidies.
When
governments grant production subsidies, what is mind is
to provide a leveled playing ground for domestic
businesses who may need to compete with foreign
competitors, or to encourage private sector contribution
to national economy. In the 1800’s for instance, the
United States
government gave large tracts of land to the railroads on
the condition that they would build lines across the
continent. Altogether, the railroads received about
160,000.000 acres (64,700.000 hectares) of land in this
way. The government also granted subsidies to telegraph
and cable companies. In the 1920s, it granted subsidies
to ship companies. It gave them generous mail-carrying
contracts and allowed them to buy government owned
ships at a fraction of their actual cost. Government
airmail contracts have also aided the airlines since
the 1920’s. Taxes on goods imported into the United
States are also indirect subsidies to US manufacturers
who produce the same kind of goods.
Governments can also impose a guaranteed minimum price
above market level. In this case, government policy also
subsidizes production.
A
consumer subsidy on the other hand- which results in
such things as bread lines , is directly lowering market
price of commodity to help the poor for instance and it
can be more sensitive when examining its final effects
on an economy such as that of Turkey.
Residents of Ankara in bread line early in the
morning. February 2002.
AND….
THE BAD AND SAD NEWS FOR TURKEY:
In the
case of the first type of subsidy - production
subsidies-, producers have an incentive to expand
supply, sometimes unnecessarily. A production subsidy
may encourage producers to accelerate resource deletion
and leads to higher production, and it may also
potentially create surpluses which can be sometimes most
visibly damaging to an economy. In a country such as
Turkey when rampant corruption has had its termite-like
effect on the whole economy, the idea of some
government subsidies going to some producers who not
only may not increase the production. but may even be
producing "imaginary products", can be enough to make
the idea of a subsidy raise the hairs on the back of
one's neck.
Concerning the second case, a consumer subsidy:
economic theory teaches us that in efficient markets
private welfare is maximized when prices equal marginal
private costs. Any deviation from this optimal level
will lead to inefficiencies. As this type of subsidy is
sometimes improperly awarded in Turkey to gain the
political support of those receiving the aid, such
decisions can end up hurting some other segments of the
public economically by creating excessive domestic
demand. If the consumption is not constrained, a
decrease foreign exchange revenues and a drain on the
government budget the economy are experienced.
These
two types of subsidy policy interventions may even exist
simultaneously and create a non-transparent web of
various distortions and a huge fiscal drain. Both
producer and consumer subsidies, either through
overproduction or over consumption, may also cause the
environment to degrade or cause other external effects.
Regardless of the cause and the effects of subsidies, in
order for subsidies to be afforded or endured by an
economy, one or more of the following must happen:
1. The
economy is simply strong enough to disregard the laws of
supply and demand and endure the bleeding: Is the
Turkish economy that?
2. The
loss of revenues from the subsidized product must be
overcome by cross-subsidies ( as in telephone industry,
charging residential customers low. rates while making
op for the losses by charging the, businesses more): As
anything else let's say that this is somewhat doable in
Turkey, but is it a smart policy to artificially and
unfairly shift this additional burden from one segment
of society to another? If any type of an investment -may
it be by the government or by the private industries
impeded by an unnecessary burden such as this on
businesses, and this impediment disregards the
principles of "trickle down economics" ( businesses
with more resources, invest they contribute to the
reduction of unemployment=: employed people with money
have more purchasing power = with their purchases they
cause the economy to grow even larger), which idea
gained popularity and proved to be a successful policy
in this country since the Reagan years, why shoot
yourself in the foot and kill the bird that can lay
golden eggs? The same bird, the private industry in
Turkey, whose extraordinary strive single-handedly is
responsible for any economical accomplishments of
Turkey in the last two decades!
3.
Levying additional taxes across the board to recover the
loses; How realistic is that for Turkey?
Subsidies are often not the right policies: they give
the wrong signals and may even be counterproductive.
Subsidies tend to waste resources, they do not produce
the intended results and they wind up in the pockets of
the wrong people. Each year, hundreds of millions of
dollars are wasted on subsidies, harming the economy,
the environment, equity and trade; these squandered
public resources can be used in a much more effective
way.
Once
the consumer subsidies are in place, it is very
difficult to wean people from them, especially if
political considerations were the underlying initial
consideration , and reducing them is certain to cause
wide protest just as the ones in Egypt in early 80’s
when the bread subsidies were discontinued and the
public reaction was so hard that they were reinstated
immediately in fear of nationwide major unrest to even
destabilize the regime. |
